2 Opportunities in the ASX Utilities Sector

Marc Kennis Marc Kennis, April 6, 2022

The ASX Utilities sector is coming back in fashion

 

The following image is the weekly chart for the ASX200 Utility index. The pattern shown on the chart is called “Round Bottom” and it is a reversal pattern. Detecting this pattern in a chart is a signal of a shift in the sentiment from bearish into bullish. In this case, the round bottom pattern is suggesting that good times maybe ahead for the ASX utilities sector.

The possible target price for this pattern is calculated by adding the depth of the pattern to the point of break out. This target is shown on the chart and points to almost 7500, which coincides with a potential resistance level at that price level. The breakout was confirmed in mid-December and the reversal was accompanied by rising volumes, which is a positive sign as to the strength of the uptrend.

 

ASX200 Utilities chart

ASX200 Utilities Index, Weekly chart (Source: Metastock)

 

As can be seen in the chart, the sector spent most of 2021 below its March 2020 pandemic lows. This happened while almost all other industries enjoyed significant rallies backed by the low price of money (interest rates) and high liquidity in the market. However, things are now changing. Inflation is no longer perceived as transitory and interest rate hikes are on the horizon. This is good news for companies in the cyclical utility sector, which are normally backed by high levels of real assets and pricing power. Companies in this sector are well-positioned to adjust with the inflationary environment we are now experiencing, which is expected to continue into the foreseeable future.

 

Two hot candidates in the ASX utilities sector
 
AGL Energy (ASX:AGL)

There are a couple of stocks in this sector that are flashing in our technical exploration system. The first one is AGL Energy (ASX:AGL) that we wrote about very recently.

 

AGL

AGL Energy, Weekly Chart (Source: Metastock)

 

AGL Energy’s share price has been in a long-lasting downtrend, since April 2017. This downtrend appears to have bottomed out around $5 and it is now showing signs of a possible trend reversal. Reasons to believe in a possible reversal are the diminishing downwards momentum as detected by the divergence between RSI and the price as well as the MACD crossover (bottom chart). The first resistance level on the way up is at $6.40 where the price will reach the downward trendline that coincides with the previous swing high level.

Therefore, from a Technical Analysis perspective it is important to monitor the price action once the price reaches that level. The developing market structure will give us early signs as to whether the price is intended to break out or not. In the case of a successful breakout, the next target is $8.00.

A failed breakout will most likely take the share back towards the $5 level.

 

TPC Consolidated (ASX:TPC)

Another candidate in the ASX Utilities sector with a promising chart is TPC Consolidated (ASX:TPC). Unlike AGL, TPC has enjoyed a massive run since 2019. However, it is still technically and fundamentally attractive with a P/E ratio of 8x and a dividend yield of 5.5%.

 

TPC

TPC Consolidated, Weekly Chart (Source: Metastock)

 

TPC is a small cap company with very small daily trading volumes, which makes its chart less reliable for technical analysis. Nevertheless, one alternative wave counting has been shown on the chart, which suggests a formation of a continuation triangle pattern. The final leg of the pattern, leg e, is expected to end somewhere between $2.50 and $2.70, which coincides with the 50% Fibonacci retracement of the rally from its very bottom in 2019. After that, the first target for this triangle pattern will be at the all-time high price of $4.60.

 

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Frequently Asked Questions

  • Who is AGL?

    AGL is an integrated utilities service provider delivering 4.5 million gas, electricity and telecommunications services to its residential, small and large business as well as wholesale customers across Australia.

  • Who is TPC Consolidated?

    TPC Consolidated Limited (ASX:TPC) owns and operates leading Australian-based electricity and gas retailer CovaU (pronounced “cover you”), which offers a wide range of competitively priced products to its customers.

  • Does AGL pay a dividend?

    Yes, AGL paid $0.65 dividend for the full year FY21, which implies a yield of around 10% at the current share price. However, the expectation is that dividends will come down in FY22.

  • TPC Consolidated pay a dividend?

    Yes, TPC paid $0.18 in dividends in FY21 and is targetting a 43% payout ratio in FY22.

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